Unchained - 2020 Highlights: The Biggest News Stories of the Year in Crypto - Ep.205

Episode Date: December 29, 2020

Host Laura Shin recaps the biggest stories of the year in crypto, with clips from shows throughout the year. In this episode, we cover how the pandemic drove Bitcoin to new all-time highs, how regulation began to come for the crypto space in a big way, plus new trends in DeFi, corporate structures, and how ETH will change as an asset.    Thank you to our sponsors!  Crypto.com: http://crypto.com 1inch: https://1inch.exchange   Episode links:  Meltem Demirors on Bitcoin’s behavior during the recession https://unchainedpodcast.com/why-bitcoin-now-meltem-demirors-and-lyn-alden-on-the-perfect-conditions-for-bitcoin/   Mike Novogratz and Raoul Pal on Bitcoin’s relation to fiat https://unchainedpodcast.com/why-bitcoin-now-mike-novogratz-and-raoul-pal-on-the-single-greatest-brand-of-the-last-10-years/   Chamath Palihapitiya on Bitcoin as a financial hedge https://unchainedpodcast.com/chamath-palihapitiya-why-bitcoin-will-be-the-category-winner/   Cathie Wood and Dan Tapiero on corporate adoption of Bitcoin https://unchainedpodcast.com/why-bitcoin-now-bitcoin-under-a-biden-administration/   Dave Jevans and Siân Jones on regulation and VASPs https://unchainedpodcast.com/why-the-travel-rule-is-one-of-the-most-significant-regulations-in-crypto/    Jake Chervinsky and Kristin Smith on the Swiss Rule and self-hosted wallets https://unchainedpodcast.com/everything-you-need-to-know-about-the-looming-battle-over-privacy-in-crypto/   Jeremy Allaire and Kristin Smith on Mnuchin’s proposed FinCEN rule https://unchainedpodcast.com/why-is-the-proposed-fincen-rule-for-unhosted-wallets-being-pushed-so-quickly/   Jessi Brooks and Zia Faruqui on cryptocurrencies facilitating illicit activity https://unchainedpodcast.com/how-this-doj-strike-force-hunts-down-cryptocurrency-criminals/    Brian Brooks on Americans accepting more privacy restrictions https://unchainedpodcast.com/acting-comptroller-of-the-currency-brian-brooks-on-crypto-banks/   Meltem Demirors on privacy being under attack https://unchainedpodcast.com/why-bitcoin-now-meltem-demirors-and-lyn-alden-on-the-perfect-conditions-for-bitcoin/   Haseeb Qureshi on the maturation of DeFi https://unchainedpodcast.com/why-decentralized-trading-has-10xed-in-a-few-months/    Vitalik Buterin on risks that still exist in DeFi https://unchainedpodcast.com/vitalik-buterin-on-ethereums-five-year-anniversary/   Taylor Monahan and Dan Guido on DeFi security https://unchainedpodcast.com/defi-security-with-so-many-hacks-will-it-ever-be-safe/    Vitalik Buterin reflecting on the last five years of Ethereum https://unchainedpodcast.com/vitalik-buterin-on-ethereums-five-year-anniversary/    Ryan Watkins on Ethereum 2.0 https://unchainedpodcast.com/ethereum-2-0-what-you-need-to-know/    Olaf Carlson-Wee on DeFi impacting the traditional corporate structure https://unchainedpodcast.com/olaf-carlson-wee-if-there-is-a-money-losing-exploit-the-money-is-gone/ Andrew Cronje on shifting corporate structures https://unchainedpodcast.com/andre-cronje-of-yearn-finance-on-yfi-and-the-fair-launch-im-lazy/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi everyone. Welcome to Unchained, your no-hype resource for all things Crypto. I'm your host, Laura Shin, a journalist with over two decades of experience. I started covering crypto five years ago and as a senior editor at Forbes was the first mainstream media reporter to cover cryptocurrency full-time. Subscribe to Unchained on YouTube, where you can watch the videos of me and my guests. Go to YouTube.com slash C-unshamed podcast and subscribe today. 1-inch exchange is Defi's leading decks aggregator that discovers the best trade practices across all dexes. One-inch was launched in May 2019 by two White Hat hackers at ETH Global's ETH New York Hackathon. One-inch has reached almost $7 billion in overall volume in just over a year. Crypto.com, the crypto super app that lets you buy, earn, and spend crypto, all in one place. Earn up to 8.5% per year on your BTC. and more than 20 other coins. Download the crypto.com app now to find out how much you could be earning.

Today's episode is a recap of 2020's biggest crypto stories. It was, to say the least, an eventful year with macro events intersecting with crypto in many, many fascinating ways. First and foremost, the pandemic highlighted the unique qualities of Bitcoin, and that began the snowball that turned into the nascent avalanche of corporate and billionaire interest that I believe is likely to only grow next year. That came alongside some heightened and less welcome by the community, regulatory scrutiny. The regulatory story is still ongoing with a particularly fraught battle playing out over the holidays over the proposed Finson role on self-hosted wallets. And I'm sure regulation will continue to be a big story throughout 2021. Other than that, the innovation site saw both

progress and setbacks and the weirdness and fun that are the hallmarks of crypto, with yield farming taking off and governance experiments giving glimpses of a decentralized future. But with hacks and exploits also keeping everyone on their toes. I hope you and your loved ones are able to celebrate the holidays in a safe way, and that you're able to also take a moment to be quiet and grateful for all the wonderful things in your life. Because I expect that 2021 is going to be a rocket ship of a year for crypto. So the first topic we'll explore in these highlights is Bitcoin. the biggest crypto story this year.

When the pandemic began, the various stimulus packages kicked in and the halving occurred. And it just felt like, how are these not the perfect conditions for Bitcoin? Meltem Demiris of CoinShare has expressed it even better when she came on the show with Lynn Alden for the Why Bitcoin Now series. Here's Milton. One important thing to keep in mind is we've never really seen how Bitcoin behaves during an economic recession. And at this point, I think it's fair to say we are in a recession. after two quarters of back-to-back economic contraction. So what I think is really interesting is for the first time,

we are actually watching Bitcoin in the environment for which Bitcoin was sort of designed, if you will. If you look at what's happening, which Lynn has alluded to and it has written about in so much of her research, the environment we're in right now that is unfolding, you know, there's all this money printing going on. When money printer go burr, right, we anticipate inflation will happen. Just because it hasn't happened yet,

And just because from a CPI or consumer price index perspective, we aren't feeling inflation doesn't mean it's not rampant in the market. If we look at the facts, U.S. home prices are seeing their fastest quarter over quarter increase in recent history, I think in 40-year history. So home prices are going up at a very rapid pace. We're seeing equities, right? Equities are trading at 2025 forward PE multiples. So people are pricing in their expectations of the future today and they're looking for growth.

So I think Bitcoin is actually starting to find its place in the narrative. We talk about narrative all the time in the crypto space. And I think one of the things Lynn alluded to when she talked about the having psyche, you know, this is one of the narratives. It's also substantiated with a lot of data. But the halving narrative is a consistent one we've had over sort of the last 12 years of Bitcoin. And I think what we're seeing now and the reason I talk about all of these facts is this

narrative that we've talked about in the Bitcoin community for, you know, the last seven years that I've been in it is now finally unfolding in the real world. And so watching Bitcoin's behavior in this environment, I think is really exciting. To me, you know, we're going to continue to test Bitcoin's strength. I think Bitcoin's decoupling from equities been interesting to watch. Bitcoin's breakout from gold has been interesting to watch. But until this actually plays out, and we have the data and the evidence, which again, that's what I love about Lynn, and she's like, show me the receipts. Right. Show me the receipts. So until we have the receipts to prove Bitcoin's behavior in this environment, we've hypothesized

about for so long, it'll be difficult to sort of say definitively what'll happen. But my view, I'm very bullish, very excited. And as our friend Raul Powell likes to say, irresponsibly long. Mike Nova Grants of Galaxy Digital and Raul Powell of Global MacroInvestor and Real Vision talked about how Bitcoin is a call option on a crisis with Fiat, which was another angle on Meltem's point about how the pandemic was Bitcoin's moment. Bitcoin really is going to disrupt one thing, right? The crypto universe was going to disrupt everything.

Bitcoin really right now is being bet on to disrupt central banks. And so the fact that, you know, backed or fidelity or real institutions are going to hold it for you and custody it, some of the crypto junkies would be like, dude, that's not even the whole spirit of crypto, right? The spirit of crypto was to get away from those institutions. Well, in a meta sense, yes, but in a specific sense, the bet on Bitcoin is a hedge versus Fiat. So it's disrupting one piece.

And so I think having those trusted names in and around keeping someone's Bitcoin safe, I mean, it's shocking, you know, like it's because it's almost comical when you originally started telling the story of this is going to be a disruption for the banking system, but can I keep it at JP Morgan? But if you think about it, the first leg here is disrupting central banks. It's this fiat that's being printed like its toilet paper. Yeah, because if you think about it in the terms of, right, we've never gone through such central bank uncertainty. None of us have lived through monetary printing of this kind of magnitude.

In fact, none of us even believed it would ever happen. So when you've got something that is so large and it continues, I mean, it doesn't go away, it gets worse and worse and worse. everybody has to ask the question, well, what could it mean? And Bitcoin is the call option on the what could it mean? And it's as simple as that. So in a big portfolio, a very little bet can end of being a very big thing if something at the central bank level, i.e. fear currency, come into a larger problem. Surprisingly, Shamath Palahapitia of social capital didn't seem to think the pandemic itself was necessarily going to be a catalyst for Bitcoin.

but he still made his case for Bitcoin as a hedge. Look, the government has done, you know, depending on how technical you want to get six or seven forms of quantitative easing since the great financial crisis. So we could have picked any one of those moments and said this is Bitcoin's moment. And what I'm trying to get across to you is that, you know, there is no seminal event. And I think that people waiting for a seminal event probably create more speculation than is healthy for Bitcoin. I think that, you know, this is a parade of terribles. It's a bunch of small things that eventually add together, bring down the entire, you know, way in which we think the financial infrastructure of the world works.

We will lose credibility in it. There will not be a single thing, Laura, that you will be able to point to. This will be the sum of many, many bad decisions. And it's the compounding of bad decisions. And, you know, historians will try. to pinpoint an event and I think it'll be not worth the time. I just think that this is in a, it's a pattern. And, you know, when you see the pattern, I think you just have to be prepared to hedge it, be on the other side of it, hope the pattern stops because quite honestly, if your

Bitcoin bet pays off, it will be catacismically destructive for the world. And that'll have enormous consequences to many people that we all know and care about who weren't hedged. in Bitcoin. And so you almost don't want it to happen. But you literally only can see one path to its success. You don't see any other reason for it to succeed even in a world where not everything else comes crashing down. Not really. I mean, I think that people could claim that it's a more frictionless payment mechanism or payment rails. I don't really buy that. I think that there are much easier to use products that eventually will become, you know, virtual payment mechanisms that connect the world, whether it's WhatsApp or the cash app or Venmo or WePay. All of these things

will eventually be threaded together in an underlying framework that will allow seamless money transfer, zero cost instantaneously, you know, in a ledger that's, that gives you a sense of security and transparency. All of these things, I think, will eventually have. happen. And so the use case for Bitcoin, I think, become less and less as a product and more and more as an instrument. And again, then you have to think about what the underlying value of the instrument is. People try to make this case for gold all the time that there is an industrial use for gold. And I would say maybe, but overwhelmingly, folks use it as an instrument to hedge other parts of their assets and other parts of their portfolio. Similarly, we will make the case.

case at infinitum for the industrial value of Bitcoin, but the overwhelming use case for the most people will be as a financial hedge. And I think that that's good enough because that's what will get our, you know, quote unquote, the, you know, the proverbial sort of grandmother, grandfather to buy this thing is that concept because they can understand that much more easily than they can understand distributed ledgers and, you know, seamless payment gateways and this and that. It's all a little gobbly book at some level. Kathy Wood of Arc Invest and Dan Tapiero of 10T Holdings and Gold Bullion International broke down how corporate adoption of Bitcoin could affect the price.

And it certainly looks like this was the year where this trend began to take off. Yassin just wrote, I think, another blog. If it's not out now, it will be soon. And it may have been part of our second paper. And basically took a look at 10 years' worth of data, all of the assets that, you know, are available to institutions and the managed assets at that. So those that are actually managed by third parties. And that's about 110 trillion in the world.

So a 10-year study in order and using correlations of returns and all of the usual metrics determined that. in order to minimize the volatility of putting Bitcoin in the portfolio and still enjoy the return, I think that was a 2.5% position. If you wanted to maximize the return and we're willing to accept more volatility, that would have been a 6.5% position. And the punchline, and this is going to be years away, but if that's 6.5, if institutions were to hue to that six and a half percent in Bitcoin, that would, you know, all of the things equal knowing what we know about the supply out here and the fact that more than 50 percent

of all the Bitcoin holders right now have held the Bitcoin for more than a year and many for more than five years. So you have to take that out as a, you know, a supply constraint. the number he came up with as a price target. I don't want this plastered all over headlines and so forth, because this is just if, if, lots of ifs there is $500,000. Oh, wow. And did he have like a certain time period or just if these things happen? This will happen gradually.

And believe me, we're talking about the institutional world. These sorts of things happen quite gradually. Yeah, but I think that's about, that's around the right number. I've quoted, I've been quoted at least 10 or 15 times in the past year with that kind of 300 to 500,000 number. It's not, it's just not too crazy. I mean, the market cap of Bitcoin now is call it 300 billion. If you understand what the, you know, the security apparatus is that is the Bitcoin network and you sort of contemplate what that kind of network is actually worth to the world, I mean, you can easily say it's worth $2, $3, $4 trillion. it's certainly worth more than one company in the NASDAQ. And so that can get you to that number.

It's just that, look, it's a complex thing. Most people don't have to realize, you know, that it is a network. They think it's a price bobbing up and down or flashing on their Bloomberg or that it's magic money or whatever it is. Magic Internet money. Regulation was one of the big news stories this year, particularly threats from regulation to crypto wallet. This was first discussed on the show when Dave Jevons of Cipher Trace, Disclosure, a previous sponsor of my shows, and Sean Jones of XREG consulting, came on Unchained to discuss the travel rule and how it would impact exchanges and transactions and transactions.

Dave starts talking about how exchanges also called virtual asset service providers or VASPs have to send each other information on customers who make transactions between exchanges. So how do I know across all virtual currencies, hundreds and hundreds and hundreds of the virtual currencies and chains, how do I know whether it's a personal wallet or a custodial wallet? So that's first one. Do I know I have to send it or not? And same on the inbound. So when I get the transaction, do I know that it came from a personal wallet or do I have to wait for this information to arrive to me from some other VASP or exchange, what have you, to come in? So that is one of the challenges.

another challenge is. And then, you know, there's a lot of technical detail around it. So how do you do it without creating a global list of every address that belongs to every exchange? So preserving privacy is a big issue that we've been working on. We believe privacy is of a dramatic importance. You know, this simple idea is, well, we'll just create a database or a blockchain of everybody. This is not in, for various reasons, a good idea. And then you have other problems around how do I know who's a VASP and how do I know who isn't and what country are they in and how do I stop ones from spoofing each other so that I can reap all of the data, pretend to be a VASB who hasn't signed up yet, get all the customer data from other people. So there's quite a number of security and privacy issues

that have to be dealt with. And of course, it has to be cross-chain. It has to be global. And so these are the technical challenges that combined with the regulatory that we've been working on as an industry. Okay, so I just want to make sure the audience has caught on. Essentially, anytime there is a transaction between two custodians, meaning two exchanges or to wallets that are both custodial wallets, then this information will be sent. And if, you know, either for the sender or the recipient that it's someone transacting using their own private keys, managing their own keys, then

the information will not be sent. But then I also want to make sure, so it sounds like depending on the jurisdiction that the types of information being sent will differ. And it sounds like, you know, your identity is a key piece of it and who you're transacting with is also a key piece. But then in terms of other things like when you said in Switzerland that they also include your transaction history a little bit or something that's... Yeah, they don't include your transaction history, but they're extending it to

self-custodial wallets where you have to make declarations about who you are. So they've taken it beyond asp to vasp. They're stretching the boundary to look at, you know, extending it to more self-custodial wallets, which is, you know, challenging and obviously not a great, not a great thing, in my opinion. And actually, seemingly out of character for the Swiss are famous. Of Switzerland from 11 or 12 years ago, yes. The first indication that regulation might threaten self-hosted wallets came from something known as the Swiss rule. Here is Jake Chauvinsky of Compound explaining what that is.

The Swiss rule basically says we are going to require financial institutions not only to collect information about transactions between, you know, customers, accounts at regulated institutions, but also, customers transactions with self-hosted wallets. So what the rule says is, in order for a financial institution to allow a withdrawal of crypto to a self-hosted wallet or to allow a deposit of crypto from a self-hosted wallet, the institution must verify the beneficial owner of the self-hosted wallet and to sort of step out of the legalese and tell you what that really means. What it means is if I am a customer of one of those financial institutions and I want to send some Bitcoin from my account at an exchange to my ledger hardware wallet, I would have to prove to the exchange that I am actually the owner of the ledger hardware wallet that I want to withdraw those assets to. And the problem is it's really hard to prove that my ledger hardware wallet belongs to me, right? What am I going to do? Show a receipt that I purchased it, send a picture. showing that it's still in my possession. I didn't give it to somebody else. So this has become a very

complex and difficult standard to meet. And the result of that is, in essence, at least as I understand it, Swiss financial institutions have simply refused to allow any transactions with self-hosted wallets because it is just too complicated to figure out how to comply with that rule. So at this point, we have this bifurcated market that Kristen mentioned in Switzerland, where you have some crypto on exchanges or with custodians in this regulated financial institution world, and that crypto can move around between those financial institutions, but it can never move off of that walled garden into a self-hosted wallet. And similarly, any crypto that is in sort of the self-hosted world, right, that people have self-custody of, that they're moving around through their own transactions

on the blockchain, they can never get those assets into the financial institution world. Yeah, that somehow seems untenable to me, but I'm not a regulator. One thing I wanted to ask was, you know, Switzerland is just one place. So if this were to be implemented there, would it really have a ripple effect or would it simply affect people who use some of the exchanges or wallets in Switzerland? Well, I'm worried that it could have a ripple effect. I worry that when you have one nation do something, then other countries will look around and say, oh, they're being tougher on illicit finance than we are, and there's sort of a race to make sure that regulations are strong enough in meeting the strongest standards.

And the reason that there is such concern about unhosted wallets is, For those who understand this space, but for policymakers who might be less schooled on the inner workings of cryptocurrency, you know, the major concern is that today, you know, cash is obviously the method of choice for criminals, whether it's for terrorist financing or for any money laundering, that is like the preferred methodology. But if I want to finance some terrorists on the other side of the world with cash, I actually have to physically deliver that cash. I have to put it in a bunch of suitcases and get on an airplane. And at some point along the way, you know, like there's a good chance I might get caught with all of that. But the concern that these regulators and policymakers have is that with self-hosted wallets, you can do very large amounts of volume almost instantaneously. And so that that is, is something that they're trying to wrap their heads around and figure out what to do. You know, sort of the irony is that the way that we track down these guys today is using, you know, there are these specialized firms that do forensic analysis of the blockchains.

And because we have information about some of the wallet addresses and don't have information about some of them, we're still able to piece together, you know, we, not me, but these firms are able to piece together and in many times identify who has that information. But the irony is that if we get to this bifurcated world, we'll have no information about the world of self-hosted wallets while having perfect information about the world of hosted wallets. And so the cure that these policymakers are coming up with by the results in the split world is actually going to make the, the, more difficult to find the bad guys and not, um, and not stop it. And so, you know, we're hopeful that by doing some education around this, that we'll be able to prevent some of these ideas from taking off in the

U.S. and not make the Swiss rule the standard that we will see globally. The story over regulation culminated late in December and a new proposed rule by FinCEN, reportedly driven solely by Treasury Secretary Steve Mnuchin. In this episode with Jeremy Allaire of Circle and Kristen Smith of the Blockchain Association, Jeremy summarizes the main issues with the proposed regulation. There's so many issues with the proposed rule. There's so many issues with the process by which this is happening. This is, you know, a midnight rulemaking, you know, attempt.

This is extremely unilateral from the Secretary of Treasury himself, despite significant objections throughout the government, including from within law enforcement to this. So this is a highly politically motivated individual who wants to jam this through and is doing everything in his power to do that despite many, many good actors in the federal government who I think realized that something like this should not be just jammed through and requires really careful review, deliberation, and planning and thinking. So we'll come back to that.

But I do want to say, you know, when you look at blockchains, like the fundamental innovation today is this infrastructure where you can actually have programmable money. The breakthroughs that are happening, this is what motivated me to get in the industry, you know, almost eight years ago was this idea that you could have, you know, money as a data type on the internet and you could program it and you could create contracts around it. and that those could be enforced by code and work globally and interoperably. And that that would eventually allow for financial services innovation and access to that financial services innovation, you know, globally as well. Really profound stuff. And, you know, this rule basically just completely ignores the fact that that even exists. It completely ignores the fact that, you know, innovation in open finance is built on this

idea of, you know, smart contracts that whether they're providing lending markets or they're providing other forms of economic arrangements are executing in code and that individuals for the first time ever have the ability to access and interact with those, that's a huge breakthrough. And I think, you know, there's obviously like the full decentralization movement, which says, well, the whole point is to get outside of regulated intermediaries and as long as we have access to, you know, to this outside. of regulated intermediaries, it's fine. It doesn't matter. But I think we want a world where, you know, financial institutions are able to offer, whether it's a business or a consumer,

are able to offer people access to this, offer access to these services around the world. I think we want that world. And, you know, effectively, you know, this rule, it says nothing to this issue. And the reality is that individuals, and businesses are going to want to be able to transact with smart contracts. Like it's sort of like, duh. Like that's like so much. And, you know, so this is essentially, I think, you know, really, really limiting. And by saying nothing to that issue, it raises very significant questions about how, you know, a coinbase.

If you're on coinbase.com, can you can you actually, you know, interact with a smart contract? What is staking? Is staking interacting with a smart contract? What are all these things? what can a consumer-facing or a business-facing institution do? So that's a major issue. And I think coming back to the procedural question, you know, what we ought to do is say, okay, we have these, you know, kind of concerns.

And I think they are legitimate concerns, you know, money laundering and financial crime is legitimate. And we can, you know, talk about that. But, you know, you don't jam it through over the holidays without any consideration, without any thinking, without any industry engagement. And the letter or the rule says, oh, yeah, we had an hour meeting in March with a few people from exchanges. And last year we went to California for a day.

Big deal. I mean, that is not industry engagement. So the reality here is that we need industry to be able to work on this and in a really material way and not just this jam-through kind of situation. Betmoot activated. The scorebed app here. with trusted stats and real-time sports news. Yeah, hey, who should I take in the Boston game?

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Conditions apply. Despite the story of what the industry perceives to be unfair and unreasonable regulation, a lot of regulators and law enforcement seem to have a more industry-aligned view of cryptocurrency. In this episode with Assistant U.S. attorney, Jesse Brooks, here's what Zia Faruqi, previously a member of the DOJ Strike Force, said, has taken down some of the biggest cryptocurrency criminals around the world had to say about cryptocurrency being used by criminals. We've given presentations on cryptocurrency, and it's amazing, particularly when you're meeting people, you know, very sophisticated, still understanding cryptocurrency. When they see the, uh, Jesse with her DOJ insignia, they're like, why don't, I mean,

literally had people say, like, why doesn't the US government just turn off? Like, isn't this all criminals? Like, people don't understand that like, A, that's not something that's possible, but B, my answer to them was always like, you know, people, have been committing crime with traditional fiat money for a long time and no one says to ban that. So like, I don't, there's this huge psychic disconnect that I just don't get of like, okay, great. Like someone uses money to do something bad. No one's talking about banning unhosted wallets in fiat. That's called cash, right?

Like, that's what cash in between someone's bed in. It's an unhosted wallet, right? And criminals do that all the time. Jesse and I could tell you stories from when we had, you know, narcotics cases where you find $200,000 and someone's hidden in the floorboards of their floor. I had a case with that once where it happened. right? And so like, no one's like, well, we should ban cash. And so it's just, it's a false narrative. And it's a question I think that it, I hope like, you know, if not, you know, years, if not months and days from now, people will just stop asking like, how much of crypto is, you know, criminals. Like, that's not the point. People just need to learn to accept that. And it sounds like, as you point out, big banks are starting to get that too. Right. It's not just not exchanges anymore. And that like, the problem isn't crypto. It's a problem is criminals. And so like criminals will commit crime, whether without crypto, there's, The question is, how can we, you know, as a society, say like, oh, is this something that should or shouldn't be regulated? I think that goes to Jesse's point. It's like, DOJ is trying to find ways to follow up.

You know, and I think they're defense lawyers. They're doing a fabulous job at trying to say, like, wait a minute, DOJ, you're going too far. Like, this is not within that. You're using a regulatory framework for, like, Western Union sending money. And that doesn't apply necessarily to someone just exchanging from one currency to another. And so there is this big open area right now for the law to get fleshed out. But that does not speak to the goodness or badness of cryptocurrency. It's here to stay and people just need to learn to live with it. Crypto.com, the crypto super app that lets you buy, earn, and spend crypto, all in one place. Earn up to 8.5% per year on your BTC.

Download the crypto.com app now to see the interest rates you could be earning on BTC and more than 20 other coins. Once in the app, you can apply for the crypto.com metal card, which pays you up to 8% cashback instantly. Reserve years now in the crypto.com app. One inch is a decentralized exchange aggregator that sources liquidity from the top dexes and liquidity sources to save users money and time on swaps. One inch is capable of finding the best possible trading paths and splitting them among multiple market depths. Recently, the one inch team unveiled one inch version two.

The main highlights of V2 are Pathfinder, an API that contains a new discovery and routing algorithm and a new, intuitive, user-friendly UI. The V2 improvements ensure the best rates on swaps while dramatically cutting response time. One of the looming regulatory issues will be privacy. And even as open and supportive as acting control of the currency, Brian Brooks is of crypto, even he seemed to indicate that Americans should be willing to accept more restrictions on privacy than people in other countries. Here's what he had to say. I would say that privacy in the U.S., financial privacy, you know, in the technical protocol looks a lot different and raises a lot of different issues compared to financial privacy and some other parts of the world. So the analogy I often give

is if you are a dissident in Cuba or if you live in Venezuela or whatever, you probably care a lot more about financial privacy and your individual transactions that we do in the U.S. And that's because, A, you care a lot more about the government not knowing that you're giving money to a political dissident or that you're sending money to a disfavored relative or whatever. In the U.S., where we are legitimately a target of terrorism every day, it feels a little bit different. Yes, there's some things we'd probably rather buy privately, but as a society, we seem to have made the judgment that the threat of people using our financial system for illegal or even terrorism purposes is sufficiently tangible that we need to protect against that and thus give up

some privacy in favor of that. So I think that there's a little bit of schizophrenia in the United States over these two things in which side do we really believe. There are times when we say we really believe in privacy as when we tell Facebook they shouldn't be using our data for any purpose and we should have total control over what data exists and who can be shared with. But then there's another side of us when we look at things like the travel rule, you know, which is applicable to platform-based crypto transactions where we've said, no, no, no, we want the government to know about all of those transactions. And send, receive information has to be appended to every single transaction on a platform. So I think we need to resolve those as a society. We haven't

done that yet. So one of the great things about our interagency process is we suss those issues out. We hear all the different views and that we try and balance them. That's a work in progress at this point. Given what's been happening with regulation on crypto wallets, it's perhaps not surprising that Meltem to mirrors of coin shares cited privacy as her biggest concern for crypto going forward. I'm only looking at one thing, and it's laws associated with privacy. Right now, encryption is under attack in the United States and in most Western nations, most developed countries. So there is a number of bills, there are a number of bills, pardon, on the floor right now. They're sponsored by Republicans, particularly Mitch McConnell and Lindsay Graham. The Earnit bill in particular is one I'm referring to, which would seek to limit and severely curtail the use of end-to-end encryption. in consumer-focused applications and implement effectively a backdoor for the NSA and other intelligence agencies and Five Eyes. You know, this organization of intelligence agencies around the world have sort of signed off on this.

We saw a few weeks ago there was a statement from the DOJ and sort of the powers that be that the calling for more surveillance on the crypto ecosystem travel rule is seeking to go from $3,000 transaction limit to a $250. dollar transaction limit. Around the world, privacy is under attack. And that means Bitcoin is under attack in many ways. Governments want to tax Bitcoin. They want to know who holds Bitcoin. They want to know what you're doing with it. And I think this is an existential threat to Bitcoiners everywhere. You know, again, I think the premise that Lenn raises premise of hard money, when you can be identified and pressured into, you know, having to pay taxes on these hard assets you hold,

Turkey right now is trying to implement a tax on gold. They're trying to figure out how to feasibly tax gold when much of the gold there is held by retail owners, you know, under their mattresses and not in bank faults. It's very hard to do. But taxing something like Bitcoin is very easy to do. And you can quickly see states try to seize these assets from people. This is my great sphere. So I'm very focused on privacy and privacy related issues. I believe it's fundamentally important that we maintain the ability for consumers around the world to use. products and services that facilitate end-to-end encryption and protect their privacy. Another big story this summer was the yield farming craze in Defi, which, as tends to happen in

crypto, took off and also died down rather quickly. Haseem Koreshi of Dragonfly Capital made the point that one of the drivers of DeFi has been the ease of use of automated market makers like Uniswap. I think there's a really amazing story about how Dex's and DeFi has started to look actually more convenient than centralized exchanges. So in the post, I shared a story of a friend of mine who was telling me, you know, there was some hot token that was that he was interested in trading and, you know, it got listed in a few places. And he was telling me like, look, I could, I could go, like, look up on Coin Gecko and

try to see which exchanges is listed on and how many of them are legit and, you know, where has the most liquidity and then send up an account and send my funds there. But it's just too much work. And so instead, like, I'm going to go, I'll just like click a couple buttons and like buy it on an aggregator or on uniswap or on whatever. that to me was a little bit of a revelation. They're like, oh, shit, people are going to use DFI because they're lazy, not because they're ideological, not because they care about non-custodial trading.

The other element of it that I think is also very important, especially in this latest bull run that we've seen kind of centered around DFI is that so much of what made Binance successful in the ICAO craze was that Binance was the first to list a lot of these assets, right? And so if you wanted to get in early, and of course so much of crypto speculation is about getting in early, you had to go to Binance because that's just where things got listed first. And now you're seeing that actually happened on defy. Defi is where it's listed first, right? Comp first traded on Uniswap before it traded on any centralized exchange. Umah was trading first

on uniswiswap. So many of these assets are first available in defy before they're available on any centralized exchange. And so if you want to get in early, if you want to get in with the cool kids, if you want to get in with what all the influencers are doing, they're all on DeFi doing it all direct. And I think that's another thing that's driving a lot of the excitement for people to get onto defy. Of course, it's driving up gas fees like crazy. But in a way, it's become part of the game that defy is now the codest, coolest place where all the people are making all the money. And that, of course, incentivizing people to say, hey, shit, I want a piece of that. Vatelik Boudarin expressed his concern over some of the yield farming media he was seeing and struck a cautionary note about it.

I think one big one is just that a lot of people are underestimating spark contract risk. So like I remember even a year ago, there were people on Twitter. I think it was making the case that, you know, hey, if you have dollars in a regular bank accounts, then you're making maybe 2% interest. And that assumes, you know, like some kind of fixed deposit whatever. And if it's variable, then it's even less. but if you put your dollars into compounds and you're getting 4%, well, why the hell would anyone choose 2% or 4%?

Clearly 4% is better. Or even if you put your dollars and die clearly 4% back when it was 4%. Clearly 4% is better. And my response was, well, 4% is only better than 2% if those systems are exactly the same in every other way, right? And in fact, for the 4% system to be better than the 2%, percent system, you basically need the 4% system to have less than a 2% chance a year of breaking, right? Because if the 4% system has a 5% chance a year of breaking, then it becomes negative 1%.

And so I feel like there's a lot of people that are just not fully taking this into account in some of their calculations. And, you know, they might think that, oh, okay, it's been safe for a while. It's been safe for a while and these projects are audited. And a lot of these D5 projects really have done a great job of auditing themselves and just doing a way better job of that and learning from the mistakes of the Dow and all of those things. But at the same time, are we safe enough that we can promise a chance of breaking of less than 2% a year?

I don't think we can get there yet. Right. So that's one thing. And so I think the main takeaway from that criticism, my guess is that defy is still fine, but like don't act like it's a place where you should advocate for a lot of regular people to put their life savings into. Now, there are, of course, places where, you know, CFI and as in the traditional banking system has risks too, right? And like, there's a lot of people who, because of their specific context, like, their money might get seized

or, like, their local currency might get hyperinflated or all these things. And so, like, if you're in one of those situations where the risks of the centralized stuff is greater than 2% a year from year than, you know, by all means, get into defy and it's safer. But or at least when I say defy in this case, I mean stable coins, right? Get into stable coins and they're safer. But like, if you're just in defy to get, you know, 4% interest instead of 2% interest, then like that's probably not something you should be doing. So that's one thing.

The other thing is that there are sometimes defy things happening that are not very sustainable. So like one big example of this is like yield farming, right? So like this is big, this big hot trends that we've been seeing recently. And you can often get these really high interest rates that was like 20%, 30%, and 100 plus percent annually. But the problem is that these interest rates are ultimately, they're paid for by reverect, awards explicitly provided by whatever protocol is doing the lending, right? Like they're either provided by compound or they're provided by whoever else. I forget what the acronyms are these days.

And those guys are not going to just keep on printing coins for people to entice people to get into their ecosystems forever, right? It's a short-term thing. And once the enticements disappear, you can easily see the yield rates and drop back down very close to 0%. So it's not a, that's not something that could make defy break, but it definitely is a sign that like we should not necessarily be treating a kind of temporary advantages that we have now as reasons or as things that we should be pushing in front of, out in front of the entire world as like reasons why everyone should get into defy because if you push them out to the

entire world, and by the time people start getting into defy, these kind of temporary advantages are not going to be there anymore. Taylor Monaghan of MyCripto and Dan Guido of Trail of Bits talked about security and defy. Here is Taylor talking about what it is that actually gives her confidence in a defy protocol and why one can never feel 100% secure. I think that I ask on Twitter two weeks ago now, you know, what are the things that like every developers should do before, you know, having $25 million in their contract on mainnet? You know, what are the big red flags? And there's a lot of like really deep in the weeds type,

you know, type things that I think are really, really important. But it was actually interesting because some of the responses were like very different, but also really enlightening. And so, you know, one thing that came out of that conversation was, you know, if someone doesn't have an audit, that's a really big red flag. Like if they don't get anyone to look at their code, that's a red flag. You know, but that doesn't, just because they have an audit, it does not mean that they're secure. It does not mean that they're ready for main net. It just means that like, you know, there's not a red flag in that area. It doesn't put a green one there. It's just not a red flag. And then some of the other ones that I think were really interesting, you know, we're around

the teams and the people and how sort of like how much effort and time they dedicated to the things that weren't the literal code. So a lot of teams obviously love to focus on the code. They love to focus on the product. They want to build this awesome system.

You know, but did they spec out the project before starting to write that code and figure out, you know, what exactly the architecture is going to look like? did they document the intended behavior? You know, does the white paper, is it like a marketing piece or is it actually, you know, a technical document that dives in all the different situations? Another really interesting one that I can't necessarily call it a red flag today because not a lot of people do it, but certainly would allow me to have more faith in a team is if they, anytime they sort of acknowledge the risks of their project or their code or their system, you know, if they've taken the time to, especially if they've taken the time to document and share

where the bad things are that could happen, that shows me that they not only have like awareness around their code base, they also have awareness that bad things could happen, which is something that is surprisingly missing in this space. And it also shows that, you know, they've taken the time to write it down and that provides like an additional level of accountability. And so, you know, all of these sort of tools, you know, there's not one thing that's going to make a project trustworthy. There's not one thing that's going to make a project secure. But if you take them all together, you know, a team that is a team that has a better chance of success is a team that, you know, has documents. They've written tests.

They have a specification. You know, they're engaged with the community for a long time. They're open to questions. They're open to answering the questions. You know, they're aware that not everything is perfect and glorious all the time and that bad things can and probably will happen. And I'll say, I think the first conversation I ever had with Robert from Compound, I was very skeptical.

And I was like, so you're just going to have all this money on the smart contract. and, you know, how are you ever going to know it's secure? And he literally just responded and he was like, well, there's always a non-zero risk. Like, it's never, there's never going to be a moment where I can go to sleep and be like, everything's perfect. Nothing bad will happen. And it really, it knocked me off my feet because I had been, you know, talking to so many people in the space where, you know, the answer would have been, oh, well, we had two audits by two different auditors and then we had it formally verified and, you know, we have 100% test coverage. You know, but it's actually Robert that gives me more faith in his team that code the compound protocol because I know that today and tomorrow and the next day, you know, that that culture is going to always be on the lookout, you know, whether that's the lookout for other hacks that may also affect the compound system, whether that's awareness of, you know, flash loans coming into existence, whatever it is. they have a better chance of success than even someone that has had all of the audits and used all of the tools. In this huge news here for crypto, Ethereum also reached its fifth birthday. Here is Vitalik Boutarin, the creator of Ethereum, reflecting on the last five years. Ethereum has definitely come a long way in the last five years, and it's definitely been really striking to just see the change, just see how much change there has been. even just see how more and more of the change is just outside of mine, even outside of

the Ethereum Foundation's control. So, like, if you remember Ethereum in 2014 and 2015, it was this much, kind of smaller TiterNade community, everyone who was doing anything important and knew each other and was coordinating really closely. There was myself, there was Gavin, there was the developer team, there were Vlad, some other people, and everyone was very closely talking to each other. And then just kind of over time, there just started to be more and more people coming into the community, right?

So I remember DefCon 1 in London was this big kind of coming out party for Ethereum in a lot of ways. And that was when Microsoft announced their cooperation with Ethereum for the first time. And like that was huge, right? Like in 2020, it's like, you know, okay, it's another bank and other software company doing something. But in 2050, it's like, whoa, you mean a big software company is doing blockchain things? And since then, there were a lot of these different banking groups doing things on blockchain.

There have been a lot of just independent individual projects that all have their own stories. Auger is pretty big and has its own story. Maker is quite big and has its own story, as do all of these other kind of sub-communities within the Ethereum ecosystem that are, at this point, even themselves bigger than Ethereum was five years ago. And so just seeing that expansion and just continuing nonstop, you know, going from 2014 and 2016, and then the big you're going to bubble. And then even past the bubble, right? It's like the hype died down. But I think the communities continue to expand in a lot of ways. just seeing that happen has been incredible.

And seeing the technology progress has been incredible, seeing things like proof of stake progress from being, you know, not sure if they can even work to an idea, to a white paper, to a spec, to now a public multi-client test network has been wonderful as well. So, you know, lots of great things are happening. And I'm very happy that lots of great things are happening. The launch of Ethereum's beacon chain was also a milestone for the second biggest cryptocurrency and was a long time in the making. Here's how Masari analyst Ryan Watkins expects the monetary policy of Ethereum 2.0 will change

how ETH functions as an asset. Chris Berniske, I think back in 2017, introduced this kind of, this paper from an academic called, I think he was like Robert Greer, about the three. superclasses of assets. The idea is that every asset in the world that has ever existed can be classified into these three different categories. One being stores of value, with the idea being that these are assets that maintain their purchasing power throughout time. Two being capital asset, with the idea being that these are assets that produce and are generated income. And then three, being commodities, which are assets that can be consumed or are there are,

transformable into something else. So examples of those that be, you know, for a capital asset would be, you know, a stock or a bond in Apple. This is kind of this like income producing asset. An example of commodity would be like oil. You can use oil for a ton of different things to power your car. You can turn it to different, you know, end products. And then for a store of value, you know, it could be debatably the U.S. dollar.

although some people would kind of scoff at that in the space, or gold, which actually is both a commodity and a store value. So that's kind of like the high-level idea of like these asset classes. Now, Ethereum and Ethereum 1.0 is a commodity and a store value. It's a commodity because it's used as gas to pay for transactions. And I think this relationship will be, or this analogy will be especially powerful when a new, EIP is introduced called EIP-1559, where the majority of transaction fees will actually be burned instead of being paid for miners. So it'll quite literally be consumed by Ethereum blockchain. For store of value, like that's Ethereum's use as a asset in, you know, DFI to store value,

to send transactions, like that's the idea. So that's Ethereum as a statistic's today. Now, if Ethereum 2.0, it introduces staking. And what staking allows you to do is you can post your ETH as collateral to become a validator on Ethereum 2.1. And now you can actually start generating yield on your, on your ETH. And the amount of yield you will get varies on the amount of ETH that's being staked. So at 524,288, ETH, you know, that kind of like he said before, like the rate that you'll be getting is very high will be about, say, like, 23, 24%.

And then at about like 10 million or 16 million each state, it'll be somewhere between like 4% and 6%. But this idea is that now you're getting a yield on, like a native yield on on ETH. So when you combine those three things, it's like, well, you have all these different sources of demand for ETH the asset and ETH is being used for all these different things. And then I'm like a little bit hesitant to say that it's unprecedented. So I've not literally explored every asset in history. But from what I have seen, there's nothing really like this. You know, something that is a non-sovereign store of value, you know, just like Bitcoin,

that is also used to power this globally scalable computer and also offers a native yields almost similar to a kind of like sovereign bond in a sense. And the combination of the three just makes me super interesting as an asset. Olaf Carlson Whee of Polychain Capital discussed how a number of trends in defy such as yield farming and DAWs show how the traditional corporate structure could transform into something else entirely. This concept of yield farming or what I sometimes call network mining, I think is a very interesting mechanism to sort of bootstrap network effects in an underlying

system. Primarily in this case, it's bootstrapping liquidity in some sort of lending marketplace or trade volume in a Dex marketplace or something like that. And in doing both the bootstrapping of the, liquidity, you're simultaneously then distributing ownership and control of that system to the underlying users. So you're sort of accomplishing two things. One is the capital formation and human coordination around what is effectively distributing what look and feel a little bit like shares of a corporation. But it's not a business entity or legal entity that's based in a specific geography or jurisdiction.

it's rather just a pure software system that allows those people to coordinate around capital and coordinate decision-making. So you're both sort of distributing ownership of that underlying system while simultaneously bootstrapping the network effects of that system. And so today, yeah, that's trading, that's lending. But I think this is a very, very useful structure potentially to bootstrap really, theoretically, any sort of platform that has network effects. And so these kind of financial service applications, I think, make a lot of sense as a first use case.

But I think over time, these types liquidity mining type schemes will actually be used to bootstrap, you know, massively multiplayer online games, bootstrap social media services, you know, any sort of e-commerce marketplace, really any sort of business model that has strong network effects where the user's, you know, kind of primary benefit is from the, activity of other users. So when I go on Facebook, right, I don't go on that website in order to interact with Facebook or some sort of service Facebook provides. I go on there because of the content that's being produced by the other users of that service. And so any sort of application where those network effects exist, in theory, you could bootstrap those network effects and distribute ownership of the underlying service using the same mechanism, which is this sort of network mining. And so to me, there's really two paths of innovation happening in the cryptocurrency landscape that sort of feed on each other and are a very powerful feedback loop between the two of them.

One is these actual defy products and protocols and just sort of thinking of them as a product, right, where I can trade a token for another token or I can get, you know, yield on an underlying asset or I can borrow assets. You're sort of kind of seeing very, very fast iteration on that product development side, but simultaneously, you're seeing incredible experimentation in the capital formation and human coordination side, which sort of props up these corporations, which are sort of sovereign to the internet rather than registered in a specific geography. And so I think that, you know, you have these two separate structures like the Dow or the decentralized organization and the DFI product and protocol. And both of these are, you know, we're just going through

a massive step function change where the pace of iteration and experimentation is hard for anyone to keep up with. Then I asked him about the Wi-Fi token of the EURN Protocol and how he saw it as representative of changing corporate structures. Yeah, I mean, you know, one could argue that, you know, every cryptocurrency sort of has this feature, but it's this ability for a group of people to coordinate around a set of rules and coordinate capital together, which is basically what a corporation is, right? You have a pool of capital. You have turnover of management, so it doesn't rely on any specific individual. You have secondary markets where the shares, which represent an interest in that capital, can trade. And then you have a governance process where the underlying

shareholders can vote on how to allocate that capital in order to improve the value of their shares. Right. And conceptually, that's what a lot of these kind of internet sovereign corporations or or Dow-like structures look like, right? They're actually replacing the corporate entity itself. All of the legal documents that are enforced in geographic jurisdictions and are, you know, a corporation is like registered with the state. That's kind of how you get it into existence. You replace that entire system with pure software.

And so it's, to me, conceptually a really big deal. But again, yeah, it looks a little bit like a toy or a mean right now. And yeah, I think that it's a really effective mechanism for bootstrapping and managing certain types of products. And it turns out specifically products that are based on smart contracts. And so over time, though, I think you'll see this sort of bootstrapping mechanism and capital coordination and sort of taking the corporate structure and putting it on the internet, replacing it with software. I think you will see that type of model applied to like social media networks, for example. or massively multiplayer online game environments. And I think we're still a ways out from those things.

But in theory, I see a reason why this structure couldn't take on, you know, many, many different types of businesses. Here's what the creator of Yearn, Andre Cronia himself, had to say about these ideas. I don't know if I'd say replaces versus a decentralized implementation thereof. But now I'm being very specific on terminology. because, you know, business structures exist because they function well. So we saw it with yearn governance as well where originally everyone was just participants

and it was quite chaotic. And eventually sort of leaders started popping up in their respective areas. You know, marketing had their own figurehead and finance had their own figurehead. And eventually these people were elevated to the positions where they're sort of the delegated decision makers. And that's very traditional business structure. But instead of where in a traditional business structure, it's very top down, this all occurred organically bottom up. So that's why I'd say you're still going to end up with the same sort of business structures if you draw it on a piece of paper. I just think the way that you arrive at who those people are

and how they are empowered to do so, it's very different. Because now if one of those actors are no longer functioning appropriately, you know, it's not a CEO that's firing them, but it's the people in the forum that are delegating their power to them that end up replacing them. So it's this mix of business and, I mean, if you look at traditional business structures and you look at traditional democracy politics structures, I think they overlap a lot in how they accomplish this.

and doing that all in a decentralized semi-anon way, I think is very, very cool. But I don't think it replaces it. I think it's just a different implementation thereof. But you agree that it is kind of like a new type of business structure that we're seeing, except just completely different from what's been around for the last couple hundred years. I mean, yeah. Yeah, yeah. So I was thinking.

Like, it's weird it being put that. way, but I guess, which is pretty cool. Thanks so much for tuning in to the 2020 highlights episode. I don't know about you, but recapping all these big stories in crypto made me even more excited for 2021 to see what events it will bring. To listen to or watch the full version of any of these clips, check out the show notes for this episode, which contains links to all the interviews included. Don't forget, you can now watch video recordings of the show on the Unchained YouTube channel.

Go to YouTube.com slash C slash Unchained Podcast and subscribe today. Unchained is produced by me, Laura Shin, with help from Anthony Yoon, Daniel Ness, Bossie Baker, Shashank, Josh Durham, and the team at CLK transcription. Thanks for listening.